OUTLOOK ’12: Asia petrochemical market to see rising competition

02 January 2012 04:15[Source: ICIS news]

By Nurluqman Suratman

SINGAPORE (ICIS)--Petrochemical markets in Asia are likely to see increasing competition in 2012, amid low levels of economic growth in developed nations, as product flows are being redirected towards emerging regions.

The emergence of the US as a key player in the chemicals export market on the back of lower domestic gas prices has changed the dynamic of global export flows, according to a report by HSBC Global Research.

Since 2008, the US has averaged polyethyelene (PE) exports of 2.5m tonnes/year – four times the average level over 1990-2007, the research firm said.

“This dynamic and the Middle Eastern capacity additions that have come on stream over the same period have significantly added to the base of low-cost product available for export,” it said.

Strong demand growth and restocking of chemicals over the last two years have also allowed the increased volumes from the Middle East to be absorbed, with limited impact on the market, HSBC Global Research said.

“However, as developed market volumes shrink in 2012, we would expect to see product rerouted towards growth markets, putting pressure on prices and volumes for high-cost exporters,” it said.

“As this low-cost base now includes both the US and the Middle East, we expect to see intensifying competition for business in export markets – particularly in Asia,” HSBC Global Research said.

Asian chemical markets, meanwhile, will continue to be weighed by the expected slowdown in the world economy in 2012, led by Western industrialised economies as the eurozone continues to struggle with its mounting debts and the US economy remains unstable.

“The problems are particularly acute in the developed world, where we now expect [economic] growth this year of just 1.3% with a further 1.4% in 2012,” it said.

“The emerging nations are not doing so badly. We remain positive on the outlook for China and India, even if China has lost some of the momentum it exhibited in 2010,” the research firm said.

However, some of the smaller emerging nations – particularly some of the Asian exporters – are doubtless vulnerable to the deteriorating external economic environment, it said.

“If Europe goes into a recession, Asia’s income and exports will suffer,” DBS Group Research said in a research report.

Demand for petrochemicals will likely be flat in some sectors, and slower in others that are directly linked to consumer goods, said Jurong Aromatics Corp CEO Mehdi Adid, citing a lag time in the effects on consumption during a financial crisis.

Adib said demand recovery will be underpinned by the strong momentum of growth in emerging market economies, such as China and Brazil.

“I hope the 2014-2015 [petrochemical] cycle will be a good strong upward trend, to make up for some of the losses we’re seeing now,” Adib said.

However, the recovery is not expected to mean a full return to the boom years in the petrochemical industry, he added.

Leading into 2012, China is expected to dominate the global chemical scene with the highest revenue increases on a percent basis, with markets such as India, Brazil and South Korea not lagging far behind, according to analysts at accounting firm Deloitte.

“Although China’s chemical industry still has some challenges to overcome, including low levels of industry concentration, limited capacity for innovation and energy efficiency, the Chinese government’s 12th Five-Year Plan will play a vital role in advancing the country’s chemical industry,” they added.

China will continue to be a major importer of most chemicals as refinery capacity growth fails to catch up with the domestic demand growth for petrochemicals and plastics, said analysts at UBS Investment Research.

“In the case of coal-based chemicals polyvinyl chloride [PVC] and methanol, we have seen energy constraints drive China to increase imports at the expense of local production rates. For urea, we see China swinging from being a net exporter to importer,” the UBS analysts added.

Due to the highly cyclical nature of the refinery and petrochemical industries and their strong correlation with GDP growth and oil prices, gross refining margins (GRM), gross integrated margins (GIM) and petrochemical spreads in Asia are expected to fall in 2012, supported by lower demand and oil prices, according to Yousseff Abboud, an analyst at Thailand-based Thanachart Securities.

The restart of operations at refineries in Japan following the 11 March earthquake and tsunami will weigh on GRMs, with the remainder of shuttered units expected to come back online by the summer of 2012, according to Abboud.

Shell’s refinery complex in Singapore is expected to return to its normal rate in early 2012, he said.

“No wonder GRM is starting to fall and we expect this trend to continue into 2012. This is also supported by lower demand and oil prices,” Abboud added.